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Concept
Recursive economics
Summary
Recursive economics is a branch of modern economics based on a paradigm of individuals making a series of two-period optimization decisions over time.
The neoclassical model assumes a one-period utility maximization for a consumer and one-period profit maximization by a producer. The adjustment that occurs within that single time period is a subject of considerable debate within the field, and is often left unspecified. A time-series path in the neoclassical model is a series of these one-period utility maximizations.
In contrast, a recursive model involves two or more periods, in which the consumer or producer trades off benefits and costs across the two time periods. This trade-off is sometimes represented in what is called an Euler equation. A time-series path in the recursive model is the result of a series of these two-period decisions.
In the neoclassical model, the consumer or producer maximizes utility (or profits). In the recursive model, the subject maximizes value or welfare, which is the sum of current rewards or benefits and discounted future expected value.
The field is sometimes called recursive because the decisions can be represented by equations that can be transformed into a single functional equation sometimes called a Bellman equation. This equation relates the benefits or rewards that can be obtained in the current time period to the discounted value that is expected in the next period. The dynamics of recursive models can sometimes also be studied as differential equations.
The recursive paradigm originated in control theory with the invention of dynamic programming by the American mathematician Richard E. Bellman in the 1950s. Bellman described possible applications of the method in a variety of fields, including Economics, in the introduction to his 1957 book. Stuart Dreyfus, David Blackwell, and Ronald A. Howard all made major contributions to the approach in the 1960s.
In addition, some scholars also cite the Kalman filter invented by Rudolf E.
Official source
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